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CFTC WITHDRAWS PROPOSALS ON INCREASING SPECULATIVE LIMITS ON AG FUTURES AGENCY TAKES ACTIONS ON MULTIPLE FRONTS TO ADDRESS AG FUTURES MARKET PERFORMANCE ISSUES… The Commodity Futures Trading Commission on June 3 announced it was withdrawing its previous proposal that would have increased speculative position limits on agricultural futures markets and created a risk-management exemption on the size of speculative positions that could be held or controlled by index and pension fund traders in agricultural futures or options contracts. The decision was taken as part of a series of actions announced by the agency designed to address agricultural futures market performance issues. The CFTC proposed the increase in speculative position limits in the Nov. 21, 2007 Federal Register. The increase would have applied to wheat, corn, soybean, soybean oil, soybean meal and several other futures contracts traded on all three U.S. agricultural exchanges. Under the proposal, the all month’s speculative position limit for corn would have increased from 22,000 contracts to 42,400 contracts, with single month limits increasing from 13,500 contracts to 26,000 contracts. Soybean all-months limits would have increased from 10,000 to 13,300 contracts, with the single-month limit rising from 6,500 to 8,600 contracts. The wheat all-months limit would have increased from 6,500 to 14,500 contracts, with single-month limits increasing from 5,000 to 11,100 contracts. Under the CFTC proposal, speculative position limits for the spot month would have remained unchanged at 600 contracts for each of these three commodities. Consistent with past CFTC practice, the higher speculative position limits would have been the same at all three agricultural futures exchanges. Concurrently, the CFTC also had issued a proposal to establish a new “risk-management exemption,” similar to the hedge exemption currently in place for swaps transactions, that would have allowed index and pension funds to exceed speculative position limits in the period leading up to the contract’s spot month. In withdrawing both proposals, the CFTC said it would be reexamining the current policy of its staff in granting exemptive relief from the agency’s federal speculative position limits relating to agricultural commodity index trading. During the review, the CFTC said it would be “cautious and guarded” before granting any additional exemptions. The NGFA had opposed both proposals, arguing that price volatility and the lack of convergence between cash and futures market prices had created severe financial stress within the grain, feed and grain processing sectors, and had disrupted grain and oilseed futures markets. In other actions, the CFTC announced it would: Propose to require more detailed information from index traders and swaps dealers in futures markets, and review whether the classification of these traders should be changed to more accurately reflect the extent of their involvement in agricultural futures markets. The NGFA had urged that the CFTC revise its so-called “commitments of traders” report to more accurately reflect the extent to which long-only investment capital is involved in agricultural futures markets. Issue a new monthly report, starting in July, on trader activity in agricultural and other markets to provide greater market transparency. Develop a proposal to improve the effectiveness of its current agricultural trade options program, presumably to ease restrictions on participation by producers and commercial grain hedgers. Develop a proposal to allow exchange-traded agricultural commodity swaps. Swaps are private, usually one-to-one counter-party transactions tailored to the needs of the buyer and seller. They often feature a built-in agreement allowing the buyer to repurchase the commodity at some future date, with the seller handling the risk financing of the hedge for a fee. In addition, the CFTC said it would direct its Agricultural Advisory Committee to work on several issues that it believes require additional industry input and study. These include: 1) developing additional “solutions” for enhancing convergence in futures and cash markets; 2) evaluating futures exchange practices for setting margin requirements, daily price limits and settlement prices; 3) discussing the role and size of off exchange, over-the-counter agricultural swaps and their impacts on the market; and 4) determining whether there are additional studies that the agency should conduct concerning current agricultural commodity prices. The agency also said it already had begun coordinating with agricultural lending regulators, such as the Federal Reserve Banks of Chicago and Kansas City, and the Farm Credit Administration, concerning financing and credit issues arising from higher margin requirements in agricultural futures markets. The NGFA issued a statement commending the CFTC for announcing “prudent and well-reasoned” actions to address several core issues that ultimately could enhance futures market performance, and noted that the actions mirrored the NGFA’s recommendations.
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